RBA should hike rates but here’s why it won’t

RBA governor Philip Lowe. Picture: NCA NewsWire / Jeremy Piper

Wages and inflation are clearly accelerating. The Reserve Bank should have been announcing Tuesday its first – modest – official interest rate rise since November 2010.

It most certainly won’t; and there’s also a capital-B, But. Two actually.

Now, the RBA had zero intention of raising rates at this meeting or indeed at its next two meetings in April or May either. The coming federal election aside, RBA governor Philip Lowe has said explicitly that he wants to first see ‘at least’ the March quarter CPI number at the end of April and indeed the June quarter one at the end of July. That’s essentially why all the ‘experts’ have zeroed in on an August meeting rate hike.

But as I have been at pains to point out, the RBA would raise earlier – even in the middle of the election campaign – if it concluded it had to. And I think it would have so concluded after seeing the March quarter CPI numbers. That was before the first ‘But’ – Russia’s attack on Ukraine.

There was no way the RBA was going to hike before Russia invaded; that became even more certain after the invasion.

The second ‘But’ is immigration. The RBA doesn’t think inflation is going to significantly and sustainably accelerate unless and until general wages rises go above 3 percent – in truth, closer to 4 per cent - a year.

It doesn’t see that happening because it believes that the return of immigration – back-packers, students and special visa-holders – will bring in the supply that employers desperately need.

Now, clearly, we can only wait to see how the Ukraine situation develops - especially the flow-on impacts to global financial markets and the global economy.

In my judgment, unless the Europeans got really serious about sanctions and, obviously, Russia went real rogue, most likely, as we’ve seen with every other ‘left field disaster’, the negative impacts would peter out in stalemate and financial bail-outs.

Only three sanctions really matter: turning off Russian gas into Europe, stopping its oil exports, and banning its access to the global financial system.

RBA governor Philip Lowe. Picture: NCA NewsWire / Jeremy Piper

The first two would have catastrophic impacts, sending oil and gas prices rocketing – apart from sending large parts of Europe cold and dark – and are not going to happen.

That’s to say, from our end - I could see Russia turning off the gas.

Trying to stop Russian oil exports would bring the US into direct conflict with Russia.

Russia is being banned from the Swift global financial platform. Good, so far as pressuring it to end the war is concerned; and it won’t impact the global financial system or the global economy.

Our local economy clearly surged much more from the end of the lockdowns in NSW and Victoria than the RBA had anticipated. We’ll see that in the GDP figures for the December quarter, on Wednesday.

The retail figures Monday showed this surge had continued into the new year, after the misleading –more in the way they were interpreted, than in what they actually showed – fall in retail sales in December.

Retail sales had surged dramatically in October and November, with the end of the lockdowns. They then fell in December, but the spending was being maintained at very high levels – for the quarter, up nearly 9 per cent.

Then, as Monday showed, we had a further near-2 per cent rise in retail sales on that in January.

Award wages rises looked modestly contained below 3 per cent in the 2021 year. But that was highly misleading, as employers rushed to pay over-award to get workers.

That suggests wage were generally rising closer to 5 per cent (annualised) in both the December and March quarters; with inflation over 4 percent - ahead of those two ‘Buts’.